Peoples’ views of taxation in Africa: A review of research on determinants of tax
compliance
Odd-Helge Fjeldstad, Collette Schulz-Herzenberg and Ingrid Hoem Sjursen
ICTD
major international centre in policy-oriented and applied development research. Focus is on development and human rights issues and on international conditions that affect such issues. The geographical focus is Sub-Saharan Africa, Southern and Central Asia, the Middle East and Latin America.
CMI combines applied and theoretical research. CMI
research intends to assist policy formulation, improve the basis for decision-making and promote public debate on international development issues.
Cover photo: Village meeting in Moshi District Council. Odd-Helge Fjeldstad.
Peoples’ views of taxation in Africa:
A review of research on determinants of tax compliance
∗Odd-Helge Fjeldstad (CMI) Collette Schulz-Herzenberg (ISS)
Ingrid Hoem Sjursen (CMI)
WP 2012: 7
October 2012
∗ This paper is prepared for the International Centre for Tax and Development (ICTD), as part of the project Peoples’ views of taxation in Africa. The main objective of the project is to provide new insights into peoples’
attitudes and behavior toward paying tax in Africa. We would like to thank Kari Heggstad and an anonymous reviewer for constructive comments on earlier drafts. Points of view and possible errors rest entirely with the
Project number 11013
Project title
1. Introduction ... 1
2. Understanding taxpayers’ behaviour: theoretical foundations ... 3
2.1 Economic deterrence ... 3
2.2 Fiscal exchange ... 4
2.3 Social influences ... 6
2.4 Comparative treatment ... 6
2.5 Political legitimacy ... 7
3. Research questions and hypotheses deriving from the theories ... 8
3.1 The African context ... 8
3.2 Tailoring research questions and hypotheses ... 9
4. Tax perception studies in Africa ... 11
4.1 Business surveys ... 11
4.2 Country specific citizen surveys ... 21
4.3 Cross-country citizen surveys ... 28
4.4 Advantages and disadvantages of survey research ... 33
5. Concluding remarks ... 34
6. Moving forward: an agenda for research ... 35
6.1 Testing new research boundaries: Afrobarometer Round 5 ... 35
References ... 40
Figures
Figure 1: Largest tax-related business obstacles experienced by firms in the private sector ... 13Figure 2: Largest non-tax related business obstacles experienced by firms in the private sector ... 14
Figure 3: Average number of visits or required meetings with tax officials by business size ... 15
Figure 4: Time spent paying taxes, number of payments and total tax rate on profits in selected countries .... 17
govern attitudes and behaviour regarding taxation? This paper examines the analytical foundation, methodological approaches and key findings of available empirical literature on taxpayer behaviour in Africa. Understanding how citizens perceive and experience taxation may provide an essential diagnostic of the political realities for tax reform. Attempts to broaden the tax base require insights into how citizens experience and perceive the tax system, whether people perceive they are paying taxes or not, what they eventually pay, their views on tax administration and enforcement, and whether and how their tax behaviour is correlated with how they perceive the state. Attitude and perception surveys of current and potential taxpayers may also help to identify perceived weaknesses of the tax system, and enable tax authorities to focus attention efficiently on high-risk categories of taxpayers.
1. Introduction
Tax evasion has been a universal and persistent problem throughout history with manifold economic consequences.1
Tanzi 2000b
Two thousand five hundred years ago, Plato was writing about tax evasion, and the Ducal Palace of Venice has a stone with a hole in it, through which people once informed the Republic about tax evaders ( ).2
McKerchar and Evans 2009: 175
Today, taxpayer non-compliance is a continual and growing global
problem that is not readily addressed ( ). Yet, there are many
indications that developing countries are hardest hit. Firm evidence on the extent of such practices is naturally hard to come by. But anecdotal evidence from different countries indicates that half or more of the taxes that could be collected remain uncollected and/or unaccounted for due to a combination of tax evasion, avoidance, tax exemptions and corruption (Richupan 1984; Bird 1992; 1989; Krugman et al. 1992; Fuest and Riedel 2009; Curtis et al. 2012).3
Cobham (2005
The most widely cited study of the domestic component of tax evasion is ), who estimates that developing countries collectively lose USD 285 billion per year due to tax evasion in the domestic shadow economy.4
This erosion of the tax base has detrimental fiscal effects and there are at least four reasons for concern. First, revenue losses from non-compliance are critical in the context of substantial budget deficit (
Tanzi 1991). Second, tax evasion may have harmful effects on economic efficiency in general (Chand and Moene 1999; Tanzi 2000a), and income distribution in particular because the effective tax rates faced by individuals and firms may differ due to different opportunities for evasion (Hindriks et al. 1999). Third, underground economic activities are often the other face of tax evasion and the expansion of these may affect implementation and outcomes of economic policies (Tanzi 2000b;
Cowell 1990). Finally, evasion and citizens’ disrespect for the tax laws may go together with disrespect for other laws and contribute to undermine the legitimacy of government (Graetz et al.
1986). Consequently, tax evasion can have unintended negative effects on a society, undermining the purpose and outcomes of the formal tax system.
Dealing with the policy problem of tax evasion requires at least some understanding of the factors underlying the individual’s decision whether to pay or evade taxes. More systematic and coherent information on taxpayer attitudes are required for better analysis and more informed tax policy design in Africa. Understanding how taxpayers think about and experience taxation may provide an essential diagnostic of the political realities for tax reform. Attempts to broaden the tax base require better knowledge of how the large majority of citizens perceive the tax system, whether people perceive they
1 Universally accepted definitions of tax avoidance and tax evasion do not exist. However, tax authorities commonly define tax avoidance as “an activity that a person or a business may undertake to reduce their tax in a way that runs counter to the spirit and the purpose of the law, without being strictly illegal” (Fuest and Riedel 2009: 3). Tax evasion, on the other hand, usually refers to efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Thus, both evasion and avoidance can be viewed as forms of tax non- compliance, as they describe a range of activities that are unfavourable to a state’s tax system.
2 Modern versions of this technology are Tax Evasion and Fraud Hotlines which many tax administrations around the world have installed. The Economist (July 17th 1996: 38) reported that in Uganda, on a special telephone hot-line people could report corrupt tax officials or tax dodgers. They got a reward, usually around 10%, of the tax recovered.
3 In 2003, the Guatemalan revenue administration (SAT) estimated the total tax evasion to be more than two- thirds of actual collections (Mann 2004). For India, Mookherjee and PnG (1995) report a confidential survey finding that 76% of all government tax auditors took bribes, and that 68% of taxpayers had paid bribes.
According to a study from Tanzania, official import statistics underreported the value of imports by as much as 70% (ESRF 1996: 6). Evasion of other types of taxes was also reported to be widespread. In a business survey conducted in Uganda in 1998, covering 243 firms, as many as 43% said they were paying bribes to tax officers occasionally or always (Gauthier and Reinikka 2001 :22).
4 Cobham’s calculation of tax evasion is based on estimates of the size of the domestic shadow economy by
are paying taxes or not, what they eventually pay, their views on tax administration and enforcement, what the perceived benefits of paying taxes might be, and whether and how their tax behaviour is correlated with how they perceive the state. Further, the political settlement between élites and citizens over how to raise public revenues is critical for state-building. Do ordinary citizens and élites have similar perceptions of taxation in a given country? Attitude and perception surveys of current and potential taxpayers may also help to identify perceived weaknesses of the tax system, as well as to enabling tax authorities to focus attention efficiently on high-risk categories of taxpayers. Finally, perception surveys offer an opportunity to explore cross-country similarities and differences, assisting regional policymakers to identifying good practise cases and lessons to be learnt.
This study assesses the design and key findings of some of the existing taxpayer surveys in Africa. It reviews the analytical foundation, methodological approaches and evidence on citizens’ attitudes and behaviour with respect to taxation. While tax perception surveys are well established for OECD countries they are scarce in low income country contexts. Available studies in Africa are limited and provide little more than scattered estimates of the distribution of tax burdens and some information on attitudes towards specific, usually local, taxes. Some business surveys also include questions on taxation, focusing on constraints and compliance costs for enterprises. Few surveys have a large enough number of respondents and a sufficient range of variables to allow for rigorous quantitative testing of different theoretical explanations.
The paper builds an argument for greater use of public opinion survey data by pointing to the strengths of such data, which include their ability to capture a broad range of explanatory variables known only to taxpayers, particularly their understanding of compliance requirements, relevant values and attitudes, expectations of risks and benefits of non-compliance. Identifying explanatory variables may help us tap into a variety of causal processes that have been posited in the literature, thus presenting opportunities to test theoretical explanations in the African context. The paper also addresses disadvantages of such surveys, including variations in definitions of issues such as non-compliance, the integrity of the respondents’ answers for deliberate or unintended reasons, and the inability to report on unintended omissions (OECD 2001). Further, surveys may be controversial in countries where the political contest is oppressive and tax authorities are unwilling to invite criticism of their integrity, public acceptance, and effectiveness.
The paper is organised as follows: Section 2 provides a brief review of the theoretical literature on taxpayer’s (non-)compliance behaviour. Section 3 outlines key research questions and hypotheses deriving from the theoretical literature. The analytical foundation, methodological approach and key findings of available empirical research on taxpayer attitudes and behaviour in Africa are examined in Section 4, which is followed by a concluding Section 5. Finally, based on the evidence that derives from this study, an agenda for further research is suggested in Section 6.
2. Understanding taxpayers’ behaviour: theoretical foundations
Systematic and coherent analysis is required to shed led on taxpayers’ attitudes and the economic and behavioural determinants of tax compliance. Strategies to gather such information need to be embedded in sound theory. An understanding of the compliance literature is an important starting point. Models and theories of taxpayer behaviour, including the decision whether or not to pay taxes, tend to reflect one of five ‘schools of thought’ that can be referred to as: (1) economic deterrence; (2) fiscal exchange; (3) social influences; (4) comparative treatment; and (5) political accountability.
These are to some extent interconnected and some represent an evolution of others.
2.1 Economic deterrence
Economic deterrence, or coercion, is the focus of the classical tax evasion model (Allingham and Sandmo 1972), which assumes that the taxpayer’s behaviour is influenced by factors such as the tax rate determining the benefits of evasion, and the probability of detection and penalties for fraud which determine the costs.5
The economic deterrence model relies upon a wide range of major assumptions that are generally unrealistic for determining behaviour (
The problem is thus one of rational decision making under uncertainty whereby tax evasion either pays off in terms of lower taxes or subjects one to sanctions. This implies that if detection is likely and penalties are severe few people will evade taxes. In contrast, under low audit probabilities and low penalties, the expected return to evasion is high. The model then predicts substantial noncompliance.
Andreoni et al. 1998). For example, it is assumed that all people respond to a change in any one variable in an identical and predictable manner; that all taxpayers have a full knowledge of the probability of being audited; and that all taxpayers have the same level of risk preference (McKerchar and Evans 2009: 175).6
Sandmo 2005 The model has also been criticized by focusing exclusively on the coercive side of compliance, at the expense of the consensual ( ). For instance, empirical data from the US and Scandinavia reveal that taxpayers pay much more tax than what could be accounted for even by the highest feasible levels of auditing, penalties and risk- aversion. The question therefore has switched from “why do people not evade taxes” to “why do people pay?” (Alm et al. 1992; Slemrod 1992).
In spite of this, the theoretical principles of economic deterrence have been widely adopted by tax administrations when developing enforcement strategies that rely principally on penalties and the fear of getting caught. There is, however, some evidence to support the relevance of deterrence strategies to addressing non-compliance (McKerchar and Evans 2009). For example, the fear of getting caught, or the probability of detection, has been found in some contexts to be an effective strategy to induce truthful behaviour. On the other hand, ‘moral’ factors have also been found to influence this decision.
These results suggest that the economic deterrence models have some relevance to compliance behaviour, but that there are other influences also to be considered. Some of these are included in the fiscal exchange framework that we now turn to take closer look at.
5 Nearly all economic approaches to tax evasion are based on this economics-of-crime framework (Becker 1968).
Cowell (1990) offers an insightful review of this analytical framework.
6 Erard and Feinstein (1994) state that the standard compliance model fails to explain compliance behaviour due
2.2 Fiscal exchange
The fiscal exchange theory suggests that the presence of government expenditures may motivate compliance. The proposition is well rooted in economics and political science (e.g. Cowell and Gordon 1988; Levi 1988; Tilly 1992; Slemrod 1992; 2003; Moore 1998; 2004). For instance, Alm et al. (1992) note that compliance increases with (perceptions of) the availability of public goods and services. They suggest that governments can increase compliance by providing goods that citizens prefer in a more efficient and accessible manner, or by more effectively emphasizing that taxes are necessary for the receipt of government services.
Accordingly, the main concern of taxpayers is what they get directly in return for their tax payments in the form of public services (quid pro quo). In this perspective, taxation and the provision of public goods and services are interpreted as a contractual relationship between taxpayers and the government.
Individuals may pay taxes because they value the goods provided by the government, recognizing that their payments are necessary both to help finance the goods and services and to get others to contribute (Fjeldstad and Semboja 2001). A taxpayer may therefore be seen as exchanging purchasing power in the market in return for government services. The existence of positive benefits may increase the probability that taxpayers will comply voluntarily, without direct coercion.7Levi (1988) refers to this as quasi-voluntary compliance since compliance is motivated by a willingness to cooperate, but is also backed by coercion. It requires that citizens and businesses receive something from the government in return for the extractions government takes from them. It also means that compliance is always conditional. It will vary as governments vary in their performance, honesty, attention to due process, and other determinants of government reliability. Without a material benefit, compliance becomes less assured. Although most taxpayers cannot assess the exact value of what they receive from the government in return for taxes paid, it can be argued that they have general impressions and attitudes concerning their own and others’ terms of trade with the government (Richupan 1987). It is then reasonable to assume that a taxpayer’s behaviour is affected by his/her satisfaction or lack of satisfaction with his/her terms of trade with the government. Thus, if the system of taxes is perceived to be unjust, tax evasion may, at least partly, be considered as an attempt by the taxpayer to adjust his terms of trade with the government.8
A main proposition of this analytical approach is that bargaining over taxes is central to building relations of accountability between state and society based on mutual rights and obligations, rather than on patronage and coercion (
Braütigam 2008; Moore 2004).9
7 The potential for free riding is obvious when the government offers collective goods in return for taxes (Axelrod 1984). However, according to the Folk Theorem, voluntary provision may not always play as a
“prisoner’s dilemma” game, in which each individual has an incentive to free ride on the provision of others.
Instead, individuals may in many cases voluntarily contribute to a public good, implying that they will pay taxes.
In theory, this occurs when service provision is both repeated and interdependent. See Gibbons (1992) for an introduction to the literature.
This idea of bargaining and negotiation over taxes is central to the concept of a social fiscal contract. This is essentially about stimulating good governance at the interface between state and society, in response to the demands of citizens. Thus, there is a strong argument that substantial governance ‘dividend’ can be gained from
8 Inferring from the core idea of a fiscal social contract, several more general theoretical propositions have been made (D’Arcy 2011: 5): (a) how a state earns its revenue determines its character (Moore 1998, 2004); (b) that the state is most responsive to those from whom it collects most of its revenue (Timmons 2005); and (c) that this dependency is the citizen’s chief bargaining tool to make the state more democratic, accountable and responsive (Levi 1988; Ross 2004).
9 Moore (2004: 312) notes that “[I]f one starts from the assumption that a core governance problem lies in the
mobilising domestic financial resources through the tax system (Braütigam et al. 2008). A ‘virtuous circle’ may be generated whereby the generation of government tax revenues leads to improved service provision, which in turn increases citizens’ willingness to pay their taxes.10
What factors make tax bargaining, either explicit or implicit, more likely to be successful? On-going research suggests that constructive tax bargaining may be more likely when (
Seen in this light, tax is not just an administrative task for citizens and governments. It is also about politics and power - the way that authority is exercised through its formal and informal institutions.
Prichard 2010: 23):
1. Various taxpayers perceive themselves to have common interests, and will thus pursue a broad tax bargain rather than narrow benefits (Moore 2008; Prichard 2009);
2. There is a high degree of mutual trust amongst taxpayers (Fjeldstad 2004);
3. Taxpayers are well organised politically and thus have the strength and unity to bargain constructively with government (Olson 1965; Levi 1988; Prichard 2009; Mahon 2005);
4. Levels of awareness and education are high, so as to encourage political engagement (Prichard 2009);
5. Links between taxation and expenditure are relatively clear to taxpayers (Bahiigwa et al. 2004;
Fjeldstad and Semboja 2001);
6. Quasi-voluntary compliance is relatively important, thus providing stronger incentives for governments to seek a tax bargain (Bates and Lien 1985); and
7. There is a minimum level of trust between taxpayers and government in order to facilitate bargaining (Prichard 2010).
The fiscal exchange theory has received much attention and is well established theoretically. Empirical evidence to support the theory is, however, ambiguous (D'Arcy 2011: 5-6). Timmons (2005) find a statistically significant and positive relationship between tax revenues (i.e. compliance) and government expenditures on social welfare in a cross-country analysis. Ross (2004) also presents evidence to support the hypothesis about fiscal exchange in his study of the relationship between taxation and democratization in 130 countries. Fjeldstad (2004), on the other hand, found no significant association between fiscal exchange (measured by satisfaction with public services) and tax compliance in his investigation of survey data from South Africa.
D'Arcy (2011) offers a possible explanation of the lack of sound evidence on fiscal exchange in the literature by suggesting that the analytical framework applied by researchers is too simplistic. In particular, she points to the fact that the modelled interaction between the citizen and the state is one- dimensional. The conception of taxation as a market exchange between two actors in the public sphere misses a crucial aspect, she argues: “- the translation of private wealth into a public resource. (…) it goes beyond a two actor exchange and, in the transition from private to public, invokes not just the citizen’s normative and contractual relationship with the state, but also how a citizen views fellow citizens” (D'Arcy 2011: 5-6).
Increasingly, researchers lean towards behavioural sciences and focus on the consensual aspects in an attempt to explain the positive motivations for compliance (Cummings et al. 2005). There is longstanding evidence from many disciplines, including psychology, sociology, accounting and
10 In practice, tax bargains may take the form of a relatively explicit quid pro quo between governments, taxpayers and their representatives, but also in the form of implicit behavioural adjustments (Prichard 2010: 22).
Two general processes seem to be particularly important in practice: (i) direct tax bargaining which involves governments making relatively explicit concessions to citizens in response to the threat, or emergence of public resistance to taxation; and (ii) indirectly, in which taxpayer resistance to taxation by an unresponsive government
economics, that behavioural factors influence non-compliance (e.g., Spicer and Lundstedt (1976);
Grasmick and Scott (1982);Yankelovich et al. (1984); Cowell (1990); Smith (1992); Alm et al. (1992);
Erard and Feinstein (1994)). Feld and Frey (2007, 2010) argue that citizens and the state appear to develop their fiscal relationships according to a psychological ‘tax contract’ that establishes fiscal exchange between taxpayers and tax authorities. This relationship, however, reaches beyond pure exchanges, and involves relationships and loyalties between the ‘contract partners’. Consequently, Andreoni et al. (1998) argue that researchers need to explore the psychological, moral, and social influences on compliance behaviour and integrate these factors into economic models of compliance.
The behavioural literature on tax compliance incorporates social and political motives to explain a sense of morale or social duty to pay taxes (Andreoni et al. (1998: 851)). Three main lines of theoretical arguments have been made in relation to tax morale, i.e. arguments focusing on (i) social influences, (ii) comparative treatment of citizens, and (iii) the strength of the national political community. Each of these is now presented in turn.
2.3 Social influences
It is reasonable to assume that human behaviour in the area of taxation is influenced by social interactions much in the same way as other forms of behaviour (Snavely 1990). Compliance behaviour and attitudes towards the tax system may therefore be affected by the behaviour of an individual’s reference group such as relatives, neighbours and friends. Therefore, if a taxpayer knows many people in groups important to him who evade taxes, his/her commitment to comply will be weaker. On the other hand, social relationships may also help deter individuals from engaging in evasion in fear of the social sanctions imposed once discovered and revealed publicly (Grasmick and Green 1980; Grasmick and Scott 1982). Theoretical research on herd behaviour in economic situations (Banerjee 1992; Sah 1991) also indicates that social influences may affect compliance, in particular by affecting the perceived probability of detection.
One of the most consistent findings about taxpayer attitudes and behaviour in Western countries is that those who report compliance believe that their peers and friends (and taxpayers in general) comply, whereas those who report cheating believe that others cheat (Yankelovich et al. 1984). Evidence suggests that perceptions about the honesty of others may affect compliance behaviour.
2.4 Comparative treatment
Equity theory suggests that individuals are more likely to comply with rules if they perceive the system that determines those rules to be impartial (McKerchar and Evans 2009: 176). Where there are perceived inequities, individuals will adjust their inputs to the exchange until fairness is restored.
Based on equity theory, addressing inequities in the exchange relationship between government and taxpayers would result in improved compliance.
Citizens may not consider their relationship with the state in a vacuum where both parties are the only actors. Likewise, they may not think about their fellow citizens without considering their own relationship with the state. They may also consider how the state treats them relative to their fellow citizens. This judgment is likely to affect not only their judgment of the state, but also how they view their fellow citizens (D'Arcy 2011: 7). If the state treats certain groups preferentially, this may colour the citizen’s relationship with the state and the group receiving favours. A crucial variable is then not just what a person (or a business) gets from the state, but what the person (or business) gets from the state (and how the state treats the person) relative to those who are in the person’s wider national
Rothstein and Teorell (2008) take this argument further and argue that ‘impartiality’ in the exercise of power is the key characteristic of ‘good governance’. They emphasize that the state’s legitimacy rests on its impartiality, i.e. the state’s “proven ability to treat citizens equally in dealings with them and to adjudicate impartially in disputes between them” (D'Arcy 2011: 8). Citizens feel able to trust their fellow citizens if they trust the state to intervene and resolve fairly when there is a breakdown in relations between citizens. Thus, compliance rests not only citizens’ trust in government, but also on their trust in each other.
2.5 Political legitimacy
One strand of the literature emphasises that higher legitimacy for political institutions leads to higher tax compliance (Torgler and Schneider 2007). Tayler (2006: 376) argues that legitimacy makes
“people feel that they ought to defer to decisions and rules, following them voluntarily out of obligation”. Legitimacy could be described as belief or trust in the authorities, institutions, and social arrangements to be appropriate, proper, just and work for the common good. According to the political legitimacy theory, tax compliance is positively related to perceptions about the government’s, in particular the tax authority’s, trustworthiness (Tayler 2006; Kirchler et al. 2008; Fauvelle-Aymar 1999). Related to political legitimacy is identification with the state in the sense of national pride.
Researchers have suggested that the group identification deriving from national pride fosters cooperative behaviour and willingness to pay taxes (Torgler and Schneider 2007).
Political scientists have addressed how political legitimacy and civic identification are fostered.
Persson (2008) argues that African countries that upon independence emphasized building national over ethnic identity have been more successful than those who allowed ethnicity to become the main animus of politics. She uses Botswana as an example of a state that succeeded in the construction of a national identity and Uganda as a case that failed to do so. Lieberman (2003) argues that the definition of National Political Community (NPC) is crucial. In an analysis of data from national surveys, he compares South Africa under Apartheid, where the NPC was small, exclusive and racially defined, to Brazil where regionalism was the main logic in an NPC that was large with many cross-cutting cleavages. Lieberman attributes the higher revenue performance of South Africa to the superior ability of a small, exclusive and cohesive group to solve collective action challenges like taxation. Citizens’
evaluations of their obligations to the state, including tax compliance, were largely conditioned by feelings of closeness or affinity towards other groups included in the state’s definition of the national political community.
Empirical studies conducted in other regions also find evidence that political legitimacy and national pride are important to tax compliance. Alm et al. (2005) find a positive relationship between attitudes towards tax and trust in the government as well as national pride in Russia in the 1990s. Based on a study of 30 developing and developed countries, Picur and Riahi-Belkaoui (2006) find that tax compliance is highest in countries characterised by high control of corruption and low size of bureaucracy.
Five ‘schools of thought’ on taxpayer behaviour have been presented above. In the following section, theory inspired research questions and hypotheses to guide empirical research are formulated.
3. Research questions and hypotheses deriving from the theories
A similar set of tax research questions that Western scholars have grappled with also concern studies of African societies: Under what conditions do citizens assent to comply with the tax laws? What are the primary motivations for compliance? What are the key determinants of tax attitudes and behaviour? Which features of citizen-state relations govern attitudes and behaviour regarding taxation?
Which theoretical school best explains citizens’ willingness to part with private resources?
Answers to these questions are important because they can inform policy makers about how to extend the reach of tax administrations. They may provide insights into what social, economic and political goods governments need to provide to citizens to ensure that taxation is accepted as a normative act;
insights into the relationship between perceptions of supply and demand for democracy and taxation;
and ultimately information about which actions could ensure the state the credibility and legitimacy necessary for effective governance.
3.1 The African context
The research questions that dominate the theoretical literature on tax compliance are as pertinent to the African context as elsewhere. However, certain socio-political conditions and variables common to many African states are likely to influence citizens’ behaviour and thus shape the research findings.
For meaningful research design and analysis, specific features of the African context should be noted:
• Relatively low GDP per capita.
• Young populations
• Extreme income inequalities.
• Low levels of human development (education, health).
• Dominant ruling parties and, generally, weak opposition, civil society and media.
• Colonial histories affecting attitudes towards the role of the state, governance and the type of public institutions, including tax administration, of a country.
• Limited (administrative) reach of national government institutions, in many cases to mainly urban and semi-urban areas.
• Large informal sectors.
• Widespread public and private sector corruption.
• Limited delivery of quality and diversity of public services by governments to citizens.
• Relatively narrow public revenue base from which to provide goods and services.
• Differing perceptions regarding service delivery across urban versus rural populations.
Yet, there are wide divergences across African states on most variables. Generalised explanations are therefore problematic. Cross-national variations require a more detailed examination of country- specific factors.
3.2 Tailoring research questions and hypotheses
Mutual consideration of the African context and recent scholarly work on taxation generate several pressing research questions and hypotheses for further research on African’s tax attitudes and behaviour. These can be grouped after the five major theoretical approaches outlined in section 2 above:
Economic deterrence
Research questions deriving from this theoretical framework include:
• How do citizens perceive the likelihood of being detected and punished if evading tax?
• How do citizens perceive the credibility or trustworthiness of the revenue administration’s sanctions against defaulters?
The following hypotheses can be formulated:
H1 Compliance is more likely when the probability of detection and prosecution is perceived to be high.
H2 Compliance is more likely when sanctions against tax evasion are perceived to be severe.
Fiscal exchange
Research questions deriving from this theoretical framework include:
• Do citizen’s attitudes towards taxation depend on their perceptions about the state’s delivery of (political, social and economic) services?
• If yes, what aspects (quality, access) and types of services (e.g. education, housing and health) matter most?
• Does one’s position in the social structure/demographic characteristics (age, gender, education, income level, profession, urban-rural, etc.) have a bearing on (a) citizens’ attitudes toward taxation, and (b) the state’s delivery of services and goods?
The following hypotheses can be formulated:
H3 A taxpayer is more likely to comply when she/he perceives her/his terms of trade with the government as fair.
H4 A taxpayer assents to pay tax because he/she is satisfied with the services received in exchange.
H5 Citizens who frequently contribute taxes (employed, urban) have higher expectations of government to deliver goods and services than those who are unemployed/do not pay taxes.
H6 Middle class citizens are more likely to assent to the normative arguments for taxation (reciprocity, development of state etc.).
Challenges facing these hypotheses include: (i) which services are of most concern, and (ii) what aspects of service delivery are critical to the citizen? The answers to these questions are also likely to differ between citizens depending on age, gender, geographical location etc.
Social influences
Research questions deriving from this theoretical framework include:
• Are peoples’ tax behaviour influenced by their perception of others’ behaviour?
The following hypothesis can be formulated:
H7 The fewer evaders a taxpayer knows, the more likely he/she will comply.
Comparative treatment
Research questions deriving from this theoretical framework include:
• How do people perceive they are treated by the state/tax administration relative to other people in their community?
• Do economic and politically weaker or marginalised groups tend to perceive taxation differently than more prosperous and influential groups?
• Does one’s ethnic group (group or regional identities) determine how they perceive the state’s delivery of services?
The following hypothesis can be formulated:
H8 A citizen assent to pay tax because she/he feels that the state treats her/him fairly relatively to fellow citizens.
Political legitimacy
Research questions deriving from this theoretical framework include:
• Are people more compliant when they feel the government is politically legitimate?
• Is there a relationship between attitudes towards democracy and attitudes towards taxation?
• Is there a relationship between citizen’s perceptions of government accountability and attitudes towards taxation?
The following hypothesis can be formulated:
H9 Citizens assent to pay tax because they feel the government is legitimate and accountable.
H10 Citizens assent to pay tax because they feel a strong sense of national identification with their fellow citizens.
In what direction do these relationships and associations work? Causality is an issue for further investigation. For instance:
• Does compliance follow from coercion?
• Does compliance follow perceptions of state legitimacy and accountability?
• Do state legitimacy and accountability follow from state responsiveness (delivery of services)?
Yet, the state requires compliance (and tax revenues) before it can deliver goods and services using public finances.
4. Tax perception studies in Africa
This section examines the use of surveys to gather evidence on citizens’ behaviour and attitudes towards the tax system. While tax perception surveys are well established for OECD countries, available studies in Africa are limited and provide little more than scattered estimates of the distribution of tax burdens and some information on peoples’ attitudes towards specific, usually local, taxes. Some business surveys also include questions on taxation, focusing on constraints and compliance costs for enterprises. The main part of this section assesses the design and key findings of some of the existing surveys in Africa. The studies examined are categorised into three groups: (1) Business surveys, aiming to identify main constraints for investors and entrepreneurs; (2) Country specific citizen surveys, addressing peoples’ views of a range of issues, including the tax system, tax payment, trust in public institutions and service delivery; and (3) Cross-country citizen surveys.11
4.1 Business surveys
Finally, the strengths and disadvantages of such surveys in the African context are discussed.
Business surveys have been conducted in several African countries during the last decade, focusing on business constraints and compliance costs for enterprises. The most comprehensive of these is the Doing Business study conducted by the International Finance Corporation of the World Bank (Doing Business 2011). It covers a wide range of variables (including taxes) that may impact the business environment in a large number of countries across the globe. In addition, country specific business surveys have been conducted in several African countries. In the following we start out by discussing the cross-country Doing Business and Paying Taxes studies, followed by a presentation and discussion of selected country specific studies.
4.1.1 Cross-country ‘Doing Business’ and ‘Enterprise’ surveys
The Paying Taxes study looks at tax systems from the business perspective. The sixth edition of Paying Taxes - the Global Picture was published in 2012.12
Doing Business 2011
It is a joint publication produced by the World Bank, the International Finance Corporation (IFC) and PricewaterhouseCoopers (PwC). The study is based on data collected as part of the Doing Business report ( ) and the 2012 report covers businesses in 183 countries (PricewaterhouseCoopers 2012). Doing Business reports generally receive wide media attention when published and commonly initiate public debates about whether the business environment is conducive or not compared to other (usually neighbouring) countries. Although Doing Business does not explicitly aim to shed light on taxpayers’ (firms) perceptions of the tax system in the country they operate, it is likely that these surveys impact on the business community’s - as well as (potential) foreign investors’ - perceptions of the tax system in individual countries. It is therefore relevant to include a discussion of these surveys in this paper.
Doing Business records the taxes and mandatory contributions that a medium-size company must pay in a given year as well as measuring the administrative burden of paying taxes and contributions.13
11 A fourth category of surveys labeled ‘Taxpayer satisfaction surveys’ is not covered by this study. These surveys are mainly conducted by the national revenue administrations in individual countries, and focus, generally on central government taxes and tax administration.
Taxes and contributions measured are profit or corporate income taxes, social contributions and labour
12 The Paying Taxes report 2012 can be downloaded from
taxes paid by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes, road and vehicle taxes, and any other small taxes or fees (PricewaterhouseCoopers 2011: 78).14
Doing Business uses a case study scenario to measure the taxes and contributions paid by a standardised business and the complexity of an economy’s tax compliance system. Tax experts from a number of different firms in each country compute the taxes and mandatory contributions due in their jurisdiction, based on the standardized case study facts (
The ranking on the ease of paying taxes is the simple average of the percentile rankings on its component indicators.
PricewaterhouseCoopers 2011: 75).
Information is also compiled on the basis of the frequency of filing and payments, as well as the time taken to comply with the tax laws in an economy.
The method applied in Doing Business is simple, which has some real benefits, not least because it is accessible to policy-makers who can make up an informed opinion about the results. The authors of Doing Business claim that some more sophisticated, although standard statistical scaling methods do not change the results. However, Hoyland et al. (2008) show that if the uncertainty in the data is taken into account, it becomes difficult to tell most countries apart on the aggregated ranking. Thus, a move of 20 or 30 places on the ranking may not reflect any real-life improvement of the underlying business-environment of the country. It may simply be due to random noise or margin of error.
Further, while the main body of the text and the country tables in Doing Business present a wide range of indicators across ten different areas, it is not always clear from the report which indicators are included in the final ranking, and what criteria are used for including or excluding an indicator in the calculation of the ranking. Hoyland et al. (2008: 11) show that (a) several of the indicators presented in Doing Business are not used for rankings, and (b) coding-decisions taken before calculating the rankings are not transparent. In spite of these and other methodological challenges, the Doing Business country ranking receives widespread attention and is widely referred to by policy makers, investors and business people.
The Paying Taxes part of the Doing Business report (Doing Business 2011) focuses on the potential to simplify the tax system and improve revenue collection in reducing tax evasion and the size of the informal economy in developing countries. Although it is not made explicit in the Doing Business reports, the theoretical foundation for the ‘tax constraint indicators’ implicitly refer to (a) the classical tax evasion model, which assumes that a taxpayer’s behaviour is influenced by factors such as the tax rate and the effectiveness of the tax administration to enforce taxes due, including compliance costs (section 2.1 above), and (b) the comparative treatment model, which assume that taxpayers’ behaviour is influenced by how they perceive they are treated by the state relative to other taxpayers/businesses (section 2.4).
The World Bank and the International Finance Corporation also conduct so called “Enterprise Surveys”. These are firm-level surveys of a representative sample of a country’s private sector, and the surveys site perceptions of firms in 135 countries. The data are based on surveys of almost 130,000 firms and contains, among other issues, rankings of the largest constraints for investment. In the following, we present relevant results from the Enterprise Surveys as well as from Doing Business 2012 for nine African countries. We have selected the sub-Saharan countries Benin, Kenya, Mozambique, Senegal, Sierra Leone, Tanzania, Uganda, South Africa and Zambia against the background that we will use
14“Doing Business measures all taxes and contributions that are government mandated (at any level - federal, state or local) and that apply to the standardized business and have an impact on its financial statements. In doing
data from these countries to examine taxpayer attitudes and behaviour in a forthcoming study (see Section 6 below).15
4.1.1.1 Findings from enterprise surveys
In the Enterprise survey, firms are asked whether they find a range of issues to be obstacles to the current operations of the firm, and have the following options: “No obstacle”, “Minor obstacle”, Moderate obstacle”, “Major obstacle” and “Very severe obstacle” (Enterprise Surveys 2012b). Figure 1 depicts the share of firms in the private sector that rate each of the six tax-related obstacles as major or very severe constraint on the business environment in each of the nine selected countries as well as the average for sub-Saharan Africa.1617
Figure 1: Largest tax-related business obstacles experienced by firms in the private sector
Similarly, figure 2 shows major business constraints not related to taxation.
15 In addition, Cameroon, Ghana, Malawi and Mali might be added depending on data availability from Afrobarometer Round 5.
16 Source: Enterprise Surveys (2012a) (
17 The data for Benin and Sierra Leone are from 2009; the figures for Kenya, Mozambique, Senegal, South 0
5 10 15 20 25
Practices of the
informal sector Tax rates Corruption Customs and trade regulations
administration Tax Business licensing and
permits
Percent
Benin Kenya Mozambique Senegal
Sierra Leone Tanzania Uganda South Africa
Zambia Sub-Saharan Africa
Figure 2: Largest non-tax related business obstacles experienced by firms in the private sector
On average in Sub-Saharan Africa, (1) electricity was found to be the most important constraint, followed by (2) access to, and cost of, financing, (3) practices of the informal sector, (4) tax rates, (5) political instability, (6) corruption, (7) crime, (8) access to land, (9) transportation, (10) customs and trade regulations, (11) tax administration, (12) inadequately educated workforce, (13) business licensing and permits, (14) labour regulations and (15) courts.18
Access to finance is the second most important constraint to firms regionally (20%) and this is listed among the four most frequently stated obstacles in all the selected countries. Practises of the informal sector are the third largest business obstacle in Sub-Saharan Africa as a whole and also seem important in the selected countries. It is rated the second largest constraint for enterprises in Mozambique and Zambia, third largest in Benin, Kenya and Uganda, and fourth largest in Senegal and Sierra Leone. In South Africa and Tanzania, informal sector practises is rated somewhat less important (7th and 8th largest constraints, respectively).
While tax rates were found to be among the top five constraints for sub-Saharan Africa as a whole (and among the top 10 constraints in all the case study countries), tax administration is seen as less problematic by businesses. In three of the selected countries, Kenya, Sierra Leone and Zambia, the tax rate is the most frequently mentioned business constraint. In the other countries, other, non-tax related issues are more important. Electricity is seen as the most important obstacle in Tanzania, Uganda and Kenya, while firms in Mozambique and Benin perceive access to finance to be the major business constraint. Finally, South African businesses perceive crime, theft and disorder as the largest obstacle to the business environment.
Though there are many similarities between the selected countries, there are also important differences. In particular, the business constraints reported for South Africa differ from the regional average as well as those reported by the other countries in Figure 1 and 2. As mentioned above, South African firms rate crime, theft and disorder as the most important obstacle. However, regionally, crime
0 10 20 30 40 50 60 70 80
Electricity Access to
finance Political
instability Crime, theft
and disorder Access to land Transportation
Percent
Benin Kenya Mozambique
Senegal Sierra Leone Tanzania
Uganda South Africa Zambia
Sub-Saharan Africa
is only rated seventh most important. Crime is also further down on the lists of each of the selected countries. In Senegal, Sierra Leone and Uganda, crime is not even among the ten most important obstacles, while in Benin it is perceived as the 10th largest business constraint. In Tanzania and Zambia it ranks 6th and, finally, crime is the 5th largest obstacle in Kenya and Mozambique. Furthermore, South Africa is the only country where inadequately educated workforce is rated among the five most important obstacles for business. There are also large cross-country variations in the share of businesses that rates electricity as the most important constraint. In Tanzania, 73% of the firms reported electricity to be a barrier, but only 9 % of the firms did so in Mozambique.
Figure 4 shows the average number of meetings with tax officials required each year for firms of different sizes. Small firms are those with 1 to 19 employees, medium-sized firms employ between 20 and 99 workers, and large firms employ more than 100 workers.
Figure 3: Average number of visits or required meetings with tax officials by business size 1920
According to Figure 3, there are no substantial differences between firms of different sizes except for in Kenya, Sierra Leone and Zambia. Kenya exhibits the largest variations. Large Kenyan firms have much fewer meetings with tax officials than medium size businesses (4.1 visits difference), and medium size businesses have much fewer visits than small firms (2.4 visits difference). In Sierra Leone the situation is a bit different. Medium sized firms have more visits than both small and large firms, and medium sized firms have more visits by tax officials than small firms. Yet another pattern is displayed by Zambian firms. For them, number of meetings is increasing by firm size.
The figure also illustrates that the average level of visits by tax officials is markedly higher in Kenya (8.8) than in the other countries which all have an average number of visits in the area between 1.8 and 3.3.
19 Source: Enterprise Surveys (2012)
20 The average is estimated based on the respondents answering 'yes' to the questions of whether visits or 0
2 4 6 8 10 12
Number of visits required
Small (5-19) Medium (20-99) Large (100+) Average
4.1.1.2 Findings from Doing Business
The Doing Business datab
regulations and their enforcement (Doing Business 2011). It indicates the regulatory cost of business, and includes a wider range of countries and subjects than the enterprise surveys. The countries are ranked in terms of the ease of doing business, which is an overall ranking of 10 elements relevant to the business environment. The individual elements in ‘ease of doing business’ are (1) starting a business, (2) obtaining and renewing licenses, (3) employing workers, (4) registering property, (5) getting credit, (6) protecting investors, (7) paying taxes, (8) trading across borders, (9) enforcing contracts, and (10) closing a business. Table 1 shows the overall ranking of countries in terms of ease of doing business. The right column describes the ranking on ease of paying taxes which is one of the ten elements of which the ease of doing business entails.
Table 1: Worldwide rank on ease of doing business and ease of paying taxes in selected African countries (ranking within sub-Saharan Africa in brackets) (Doing Business 2012)(Doing Business 2012)(Doing Business 2012)(Doing Business 2012)21
Rank
Ease of doing business Ease of paying taxes
South Africa 35 (2) 44 (7)
Zambia 84 (7) 47 (8)
Kenya 109 (9) 166 (36)
Uganda 123 (12) 93 (14)
Tanzania 127 (14) 129 (25)
Mozambique 139 (18) 107 (20)
Sierra Leone 141 (19) 76 (12)
Senegal 154 (26) 174 (40)
Benin 175 (39) 170 (38)
South Africa is rated highest, while Senegal and Benin are at the bottom of the list both in terms of doing business and paying taxes. However, some of the other countries are performing much better on one ranking than the other. For instance, Kenya is ranked as 109th on the ease of doing business worldwide, but is rated as low as 166 on the ease of paying taxes. For Sierra Leone it is the other way around; it is ranked 141st on the ease of doing business, but does much better in terms of paying taxes (76th). These findings strengthen the impression from the Enterprise surveys discussed above (see Figure 1 and 2): there seems to be substantial variations in business constraints between the countries in our sample.
Figure 4 gives a graphic presentation of the three components of the ease of paying taxes indicator discussed above, namely the average of the total number of tax payments, the total number of hours spent on preparing taxes and complying with rules and laws, and the total tax rate (measured as share of commercial profits), for medium-sized companies each year (Doing Business 2010: 53). The figure includes all the selected countries, as well as the regional and OECD average.
Figure 4: Time spent paying taxes, number of payments and total tax rate on profits in selected countries 22
The Figure shows that the total tax rate on profits is lower than the SSA average rate (57% of profit)23
The average number of payments made by firms is more than three times the size in SSA than in the OECD region (37 vs. 13 payments). Among the countries in our sample, Senegal (59), Benin (55), Tanzania (48) and Kenya (41) lie above, and Uganda (32), Sierra Leone (29) and South Africa (9) below, the regional average. Mozambique and Zambia have numbers equal to the regional average.
South Africa is the only country where the number of payments is lower than the OECD average.
in all the selected countries except for Benin (66%), which has the highest total tax rate in the sample.
Zambia is by far the country with the lowest tax rate on profits (15%), and, together with Sierra Leone (32%), South Africa (33%), Mozambique (34%) and Uganda (36%), it has a rate below the OECD average of 43%. Tanzania (46%), Senegal (46%) and Kenya (50%) all have tax rates on profits between the OECD and SSA average.
The variation in time spent on paying taxes and complying with rules and laws is extensive. While the number of hours spent on paying taxes annually in Senegal is 666, firms in Zambia only use 132 hours on paying taxes every year. Six of the nine selected countries are rated below the SSA average (318 hours) in terms of this indicator.
Though Zambia has the lowest tax rate of the countries in the sample (14.5%), figures from the Enterprise Survey shows that tax rates are seen as the top constraint by firms in Zambia (see Figure 1).
22 Source: Doing Business (2012)
23 It should be noted that this average is heavily affected by the tax rates in the Comoros, the Democratic Republic of Congo and The Gambia where tax rates are 218%, 340% and 284%, respectively. When these three
15 36
46 33 32 46 34
50 66 43
57
37 32
48 9
29 59 37
41 55 13
37
132
213 172
200
357
666 230
393 270
186
318
0 100 200 300 400 500 600 700
Zambia Uganda Tanzania South Africa Sierra Leone Senegal Mozambique Kenya Benin OECD SSA
Time (hours per year) Payments (number per year) Total tax rate (% profit)
The Doing Business and the Enterprise surveys are inadequate to explain why the perception of firms are so strongly opposed to the level of the tax rates, even though the Doing Business numbers suggest them to be far below the regional and OECD average.
To sum up, the surveys show that tax rates are viewed as an important obstacle for business in the individual countries, as well as in Sub-Saharan Africa as a whole. Furthermore, tax rates are perceived to be a much larger obstacle than tax administration. Of non-tax related issues, practises of the informal sector and supply of electricity are the most frequently mentioned business constraints regionally, but there are substantial differences across countries. Large disparities between countries are found in the number of required meetings with tax officials, but also between companies of different sizes within countries. The costs associated with tax payments vary extensively between the countries. Thus, while providing interesting and useful findings about regional challenges related to taxation, cross-country studies are far from sufficient in the study of taxpayer behaviour.
4.1.2 Country specific business surveys
A series of country and sector specific surveys have been conducted across Africa. In the following we summarise the design and findings of two surveys, which have received attention due to the strength of the methodologies and the policy relevant findings. The first is a survey of enterprises in Uganda (Gauthier and Reinikka 2001) and the second a survey of small businesses in South Africa (Coolidge and Ilic 2009).
4.1.2.1 Uganda: Shifting tax burdens through exemptions and evasion
The study by Gauthier and Reinikka (2001) uses detailed information on taxes and firm characteristics from a survey of 243 firms in Uganda conducted by the World Bank and the Ugandan Private Sector Foundation. Firms were interviewed in 1998 on their activities in 1995-97, including physical investment, exports, infrastructure services, taxation, policy credibility, regulation, and corruption. The survey requested confidential information on costs, sales, tax payments etc. To obtain cooperation from the respondents, the interviews were carried out by the Uganda Manufacturers Association. In addition to quantitative data, the survey also collected information on the firms’ perceptions of various constraints to investment.
A stratified random sample for the survey was constructed using the following criteria (Gauthier and Reinikka 2001: 5):
• The sample should be reasonably representative of the population of establishments in five major economic sectors.
• The establishments surveyed should account for a substantial share of national output in each of the industrial categories.
• The sample should be sufficiently diverse in terms of firm size.
• There should be enough representation outside the capital city Kampala to draw conclusions about industrial activity in Uganda as a whole.
The survey was based on a partial industrial census update from 1996 of the then latest complete industrial census in Uganda from 1989. Only 8 out of the 39 districts in the country were included.
However, despite its limited geographical coverage, the 8 districts in the 1996 update represented 80%
of value added in the private industrial sector and 70% of employment, based on the 1989 census.
The study shows that tax exemptions and evasion were widespread among businesses in 1995-97. Tax evasion was found to be especially prevalent among smaller firms, while larger firms tended to reduce their tax obligations through official tax incentive (exemption) programmes, leaving medium-sized firms bearing a disproportionate share of the total tax burden. These findings suggest that the inverted U-shaped relationship between taxes and size derives from the relationship between tax erosion patterns and firm size (Gauthier and Reinikka 2001: 10). That medium-sized firms support the heaviest tax burden in proportion to sales suggests that they have a competitive disadvantage relative to smaller and larger firms. Domestic-owned firms tended to bear half the tax ratio (4.5%) of foreign firms (8.3%) or joint-ownership firms (8.2%) in 1995. The lighter burden of domestic firms was found to be mainly due to differences in evasion behaviour, with 64% of domestic firms classified as evaders compared to just 40% of foreign-owned firms and 44% of joint-owned firms.
Firms were also asked about various forms of contacts with the national tax administration, the Uganda Revenue Authority (URA). For example, they were asked whether they had been audited by the URA, and if there were any differences between the firm’s self-declaration and the revenue authority’s assessment over the last three years (i.e. in 1995-97). Furthermore, they were asked if they had to pay bribes to public officials, including tax collectors, and if so, how much.
Over 40% of the surveyed firms reported audits for corporate tax, while as many as 75% of VAT- paying firms reported audits, which are very high shares when compared to other countries. The high auditing frequency indicates a serious lack of (quasi-)voluntary compliance and a low level of mutual trust between the tax authority and the taxpayer (see Chen and Reinikka (1999). The firms audited for corporate tax and VAT were mainly larger, and the firms audited for corporate tax typically did not have access to exemptions. Furthermore, half of the firms surveyed challenged their tax assessments.
The difference between the Uganda Revenue Authority’s assessment and the firm’s self-declaration was, on average, 83%. Gauthier and Reinikka (2001: 21) found that the probability of the firms’ own assessment being different from that of the tax administration was significant and negatively correlated with tax exemptions. In other words, the more exemptions a firm has, the less likely it is to disagree with the revenue authority over its tax assessment.
The sampled firms were asked to rank a number of constraints, including tax administration and tax burdens (Gauthier and Reinikka 2001: 18). Tax administration was perceived as the sixth most binding constraint overall (out of 24). On average, as many as 64% of the respondents ranked tax administration and tax burdens as a major constraint. With regard to customs, 32% of the respondents felt it represented a major constraint. Customs-related constraints increased with firm size, reflecting the fact that large firms are often importers.
Finally, firms were asked if they usually paid bribes to tax and customs officers, and if so, the amount (Gauthier and Reinikka 2001: 22). Bribe payments to tax officials are a means of gaining favours, and especially of reducing tax obligations or payments. As many as 102 of the 237 surveyed firms (43%) reported paying bribes to tax officials occasionally to always, while 75 (38%) out of 197 firms reported having to pay bribes to customs officials. The frequency increased with firm size. As many as 60% of the large firms said they paid bribes to tax officials (occasionally to always) compared with just 13% of smaller firms. The actual burden of bribe extraction by public officials was found to be heaviest for medium-sized firms.
Gauthier and Reinikkas’ study is interesting both with respect to the rigorous methodology applied and with respect to some of the findings. Firstly, it shows that - if properly designed and implemented - it is possible to gather quite rather sensitive data on firms’ tax behaviour and attitudes. Second, it indicates that businesses’ tax behaviour may differ substantially depending on the company’s size and the sector it is operating in.
